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Six fixed income hot topics and how to trade them using the Saxo Platform
Summary: You hear a lot about the steepening of the U.S. yield curve, but you don't know how to exploit it in your trading strategy? This article looks at six critical fixed income topics and explains how you can trade them using the Saxo platform.
(1) Using bonds to diversify one's portfolio and reduce losses
The relationship between equities and bonds is not straightforward because the riskier the bond is, the more correlated is to the stock market. However, bonds such as the U.S. Treasuries and Bunds are negatively correlated with the stock market because they are perceived as risk-free assets, thus safe-havens. Safe-havens are instruments that are expected to retain or increase in value during times of high market downturns.
For example, in February and March 2020, investors sold stocks to buy U.S. Treasuries and Bunds in an attempt to find shelter as chaos unfolded. This behaviour aggravated the stock market selloff, and while in the U.S. Treasuries went up as much as 9%, the S&P fell more than 30%. This is the perfect example of why bonds are a vital component of a well-balanced portfolio because they provide diversification and reduce losses.
How can I trade U.S. Treasuries and Bund on the Saxo Platform?
a. Buy cash bonds. This can be easily be done by searching the bond you would like to purchase on the search toolbox. The ISIN for the 10-year Benchmark bonds for U.S. Treasuries and Bund are
Benchmark safe-haven ISINs | |
Ten-Year Bund | DE0001102531 |
Ten-Years U.S. Treasuries | US91282CAV37 |
b. Buy ETFs investing in U.S. Treasuries and Bunds
TLH - iShares Barclays 10-20 Year Treasury Bond Fund
IEF - iShares USD Treasury Bond 7-10yr ETF
SHY- iShares USD Treasury Bond 1-3yr UCITS ETF
D5BB - Xtrackers II Germany Government Bond UCITS ETF
D5BC - Xtrackers II Germany Government Bond 1-3 UCITS ETF
EXHD- iShares eb.rexx Government Germany 5.5-10.5 UCITS ETF
(2) How to trade the steepening of the U.S. Yield curve
What is it?
When one talks about the U.S. yield curve steepening, he's referring to the fact that long-term yields are rising faster than short-term. If yield rise, the price of the bonds fall.
How can I trade it on the Saxo Platform?
a. Sell the long part of the yield curve
In the Saxo Platform, one cannot short cash bonds. Thus, in order to sell the long part of the yield curve, it is necessary to use CFD ETFs. The ones available on the Platform are:
TLT - iShares USD Treasury Bond 20+yr UCITS ETF (USD)
TLH - iShares Barclays 10-20 Year Treasury Bond Fund (USD)
IEF - iShares USD Treasury Bond 7-10yr ETF
(3) Create a buffer against rising interest rate by buying higher-yielding securities or ETFs
In this scenario, it is important to note that if interest rates rise, bonds' price will fall. Still, coupon income will create a buffer against falling prices.
You can find high yield bonds in the Saxo Platform by browsing by name or ISIN on the "find instrument" toolbar. You can also access an inspirational bind list by clicking on Research -> Bonds -> scroll down you will find "U.S. High Yield Bonds" or other categories.
In case you are looking for High yield ETCs they can refer to:
HYG - iShares iBoxx USD High Yield Corporate Bond
(4) How to hedge against inflation rising in the United States
If inflation rises, therefore it is necessary to seek inflation protection through Treasury Inflation securities.
a. Buy TIPS
Treasury Inflation Protection Securities | |
Current Maturity | ISIN |
Five Years | US91282CAQ42 |
Ten Years | US912828ZZ63 |
Twenty Years | US912810QF84 |
Thirty Years | US912810SM18 |
b. Gain exposure to TIPS ETFs
TIP - iShares Barclays TIPS Bond Fund (USD)
TIPSA - iShares USD TIPS UCITS ETF (EUR)
LTPZ - PIMCO 15+ Year US TIPS Index (USD)
TIPS - PIMCO Broad U.S. TIPS Index Fund (USD)
(5) Take advantage of the ECB’s accommodative monetary policies
While in the U.S. Treasury yields will rise amid an increase of inflation expectations, in Europe, inflation will lag. Thus, we expect more accommodative monetary policy from the ECB. It will be supporting for Bond prices and will benefit securities that trade rich compared to peers as well as long durations
How can I trade it on the Saxo Platform?
a. Buy Long-term European sovereign bonds. Please find below a table with key European benchmarks and their ISIN number:
Current 10-year Benchmark Sovereigns | |
Country | ISIN |
Germany | DE0001102531 |
France | FR0013516549 |
Netherlands | NL0014555419 |
Italy | IT0005422891 |
Spain | ES0000012G34 |
Portugal | PTOTELOE0028 |
Greece | GR0124036709 |
Current 30-year Benchmark sovereigns | |
Germany | DE0001102481 |
France | FR0013480613 |
Netherlands | NL0015614579 |
Italy | IT0005398406 |
Spain | ES0000012G00 |
Portugal | PTOTEBOE0020 |
b. Buy long-term ETFs with exposure to European Sovereigns such as:
DBXG - Xtrackers II Eurozone Government Bond 25+ UCITS ETF
DBXF - Xtrackers II Eurozone Government Bond 15-30yr UCITS ETF
DBXB - Xtrackers II Eurozone Government Bond 7-10yr UCITS ETF
(6) Inflation rising in the United Kingdom
How can I trade it on the Saxo Platform?
a. Buy Inflation-Link Gilts
Inflation-Linked Gilts | |
Current Maturity | ISIN |
Five Years | GB00B85SFQ54 |
Ten Years | GB00B3Y1JG82 |
Twenty Years | GB00B3LZBF68 |
Thirty Years | GB00BZ13DV40 |
b. Buy Inflation-Link Gilt ETFs
GILI - Lyxor ETF iBoxx UK Gilt Inflation Linked (GBP)